Friday, October 10, 2008

I Hope We've Been of Some Practical Use to You This Week: The Official Demise of the Oil Bubble

In one of the more interesting weeks in finance, markets and stuff that I can recall, part of the challenge is keeping ones eye on the macro picture when the headline emotional reaction is tempting you one-hundred-eighty degrees the other way. Specifically I'm thinking about gold, more after the link.From MarketBeat:The Official Demise of the Oil Bubble

On Sept. 11, 2007, the price of crude oil closed at $78.23 a barrel — the last time oil closed below $79 a barrel, until Friday. What seemed like a bewildering ascent in the price of crude at the time is now a relief to traders, who watched oil fall $8.98 a barrel to close at $77.61 on the New York Mercantile Exchange, the lowest closing price in more than a year.

Like a number of other commodities, oil’s move went from a steady ascent to a vertical bounce in the spring of 2008, topping out near $150 a barrel before speculative excess started to drain from the market. And those who believed that the oil price was justified by fundamentals — being, as it is, an actual product, rather than an Internet company’s vague promise of revenue — are smarting.

“This is a market that is basically returning to the price level of a year ago which it arguably should never have left,” says Tim Evans, energy analyst at Citigroup. “We pumped up a big bubble, expanded it to an impressive dimension, and now it is popped and we have bubble gum in our hair.”

Black, stinky, oozing bubble gum, perhaps, but the point is taken. The decline in worldwide demand is only the secular story in this rapid decline in oil. The unwinding of large-scale leverage positions in commodities has meant the end of the spring’s most popular trade, one based on going long inflation (that’s commodities) and short everything else....MORE

The drumbeat of news, hype and promotion about gold this week have been quite amazing in their intensity. Every source, reputable, disreputable whatev has been hammering on the gold theme. Today, the safe haven traded in a$108.00 range! The high for the December contract was $937.00, the low, $829.00 and it closed at $853.00 down $33.50 on what for many investors was the scariest day they can remember.

We have been saying for a while now that gold is not the correct positioning for the current situation, disregarding the flight-to-safety angle (and for a day or two looking silly) in favor of the big picture: Deleveraging.